Safeguarding the interests of shareholders

The departure of Katherine Garrett-Cox from Alliance Trust has made headlines in recent days, which was hardly surprising given her high profile in the City and beyond. But if you think that the drama at Alliance Trust over the past couple of years has been something of a public relations own goal for such a widely-followed investment company, you’re making a mistake; in fact, it has been a marvellous advert for the closed-ended fund sector.

It’s worth thinking back to how the Alliance Trust saga began: a group of shareholders, including a major new investor in the company, became unhappy about the performance of the fund and its charges and began arguing for a number of changes. They used EGMs and AGMs to put their case to other shareholders and Alliance Trust’s board also had an opportunity to respond with proposals of its own.

Jumping back to where we are today, reflect on the consequences of what has taken place. Not only has Alliance Trust’s performance improved, but it has also embarked on a cost-cutting drive that continues. The board has also set out its approach to ensuring that the discount at which the fund’s shares trade relative to the value of its assets is controlled – and ideally maintained in single digits.

“With ongoing charges of 60 basis points, the fund is already very competitive,” the investment company analyst Morningstar points out. “The board is targeting ongoing charges of 60 basis points by the end of 2016.”

This is exactly how investment companies are supposed to operate. They are not pet funds for investment managers with a right to go on looking after them in perpetuity. Rather, they maintain independent boards who have a fiduciary duty to safeguard the interests of shareholders; and those shareholders have voting rights that they may exercise in order to effect change where they feel it is necessary.

Now, you can argue about the rights and wrongs of what has taken place at Alliance Trust until you are blue in the face – and some of the debate has got very personal. This isn’t the place to discuss which side right falls on; that is, in any case, irrelevant now that the fund’s board and its shareholders have made their decisions.

Just think, however, of all those investors in open-ended funds who feel similarly strongly about the performance or cost of the vehicles in which they are invested. They have no equivalent right of recourse – their choice, when unhappy with their manager, is a stark one. Either they sell their holding and take their money elsewhere, or they stick with it in the knowledge they have no power to demand change.

The Alliance Trust story – and it is far from the only example of investment company shareholders exerting their rights – underlines a very crucial difference between closed-ended funds and their open-ended equivalents. The former have an established governance structure that gives shareholders rights over their company; the latter don’t. It sounds like a technical distinction, but in practice, it’s hugely important.